The following is the Balance Sheet of Tanu and Manu, who share profit and losses in the ratio of 5:3, on March

Numerical Questions · Q20

The following is the Balance Sheet of Tanu and Manu, who share profit and losses in the ratio of 5:3, on March 31, 2017:

Balance Sheet of Tanu and Manu as on March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	62,000	Cash at bank	16,000
Bills payable	32,000	Sundry Debtors	55,000
Bank loan	50,000	Stock	75,000
General Reserve	16,000	Motor car	90,000
Capital:		Machinery	45,000
Tanu	1,10,000	Investment	70,000
Manu	90,000	Fixtures	9,000
Total	3,60,000	Total	3,60,000

On the above date the firm is dissolved and the following agreement was made: Tanu agreed to pay the bank loan and took away the sundry debtors. Sundry creditors accepted stock and paid ₹10,000 to the firm. Machinery is taken over by Manu for ₹40,000 and he agreed to pay off bills payable at a discount of 5%. Motor car was taken over by Tanu for ₹60,000. Investment realised ₹76,000 and fixtures ₹4,000. The expenses of dissolution amounted to ₹2,200. Prepare Realisation Account, Bank Account and Partners' Capital Accounts.

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Concept understanding — Partnership Accounting

Partnership Accounting — Your First Look

Think of a partnership as a group of friends starting a food stall together. One brings the money, another brings the cooking skills, a third brings the location. They agree to share the profits — but not necessarily equally. They also agree that if the stall loses money, they'll share the loss too.

That's the everyday intuition. Now let's make it precise.

What is a Partnership?

According to the Indian Partnership Act, 1932, a partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The NCERT Class-12 textbook defines it as a business owned and run by two or more persons (maximum 50, as per Companies Act, 2013) who contribute capital and share profits/losses in an agreed ratio.

The key features are:

Two or more persons — minimum 2, maximum 50
Agreement — written (partnership deed) or oral
Profit-sharing — the core purpose
Unlimited liability — each partner is personally liable for the firm's debts
Mutual agency — each partner can bind the firm and other partners

Why Does Partnership Accounting Matter?

A sole proprietor has one owner — simple. A company has many shareholders — complex but structured. A partnership sits in between. The accounting challenge is: how do we track each partner's claim on the business?

The business is separate from the partners for accounting purposes, but the partners are personally involved. We need to record:

What each partner brings in (capital)
What each partner takes out (drawings)
What each partner earns (interest, salary, commission, share of profit)
What happens when a partner joins or leaves

The Two Key Accounts

1. Capital Account

This records the permanent investment of each partner. There are two methods:

Fixed Capital Method — Capital remains constant unless partners decide to change it. All other transactions go to a separate Current Account.

Fluctuating Capital Method — Capital changes with every transaction (drawings, interest, salary, share of profit/loss). Only one account per partner.

NCERT recommends the Fixed Capital Method for clarity. Here's the format:

Partner's Capital Account (Fixed Capital Method) | Particulars | A (₹) | B (₹) | | Particulars | A (₹) | B (₹) | |---|---|---|---|---|---| | To Balance c/d | 50,000 | 30,000 | | By Balance b/d | 50,000 | 30,000 | | | | | | By Bank (additional capital) | — | — | | Total | 50,000 | 30,000 | | Total | 50,000 | 30,000 |

The opening balance is the capital brought in. The closing balance is the same unless additional capital is introduced or capital is withdrawn permanently.

2. Current Account

This records everything else — drawings, interest on capital, interest on drawings, salary, commission, and share of profit/loss.

Partner's Current Account (Fixed Capital Method) | Particulars | A (₹) | B (₹) | | Particulars | A (₹) | B (₹) | |---|---|---|---|---|---| | To Drawings | 5,000 | 4,000 | | By Balance b/d | 2,000 | 1,000 | | To Interest on Drawings | 250 | 200 | | By Interest on Capital | 3,000 | 1,800 | | To Balance c/d | 5,750 | 3,600 | | By Salary | 6,000 | — | | | | | | By Commission | — | 4,000 | | | | | | By Share of Profit | — | 1,000 | | Total | 11,000 | 7,800 | | Total | 11,000 | 7,800 |

The balance in the Current Account can be debit (overdrawn) or credit (undrawn profit).

The Profit and Loss Appropriation Account

This is the heart of partnership accounting. It shows how the net profit is distributed among partners — not how it is earned.

Important

The Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. It starts with Net Profit (from the P&L Account) and then shows appropriations.

Format:

Profit and Loss Appropriation Account | Particulars | Amount (₹) | | Particulars | Amount (₹) | |---|---|---|---| | To Interest on Capital: | | | By Net Profit (transferred from P&L A/c) | 1,00,000 | | — A | 6,000 | | By Interest on Drawings: | | | — B | 4,000 | | — A | 500 | | To Partner's Salary: | | | — B | 300 | | — A | 12,000 | | | | | To Partner's Commission: | | | | | | — B | 8,000 | | | | | To Profit transferred to: | | | | | | — A's Current A/c (3/5) | 42,120 | | | | | — B's Current A/c (2/5) | 28,080 | | | | | Total | 1,00,800 | | Total | 1,00,800 |

Notice: The total on the debit side equals the total on the credit side. The net profit plus interest on drawings is the distributable profit. …

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On dissolution, every asset (except cash/bank) and every outside liability is transferred to the Realisation Account at book value; assets taken over by a partner are credited to Realisation and debited to that partner's capital, while a liability taken over by a partner is debited to Realisation and credited to that partner's capital. The profit-sharing ratio is 5 : 3, so the General Reserve of ₹16,000 is split ₹10,000 : ₹6,000.

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Sundry Debtors	55,000	By Sundry Creditors	62,000
To Stock	75,000	By Bills Payable	32,000
To Motor Car	90,000	By Bank Loan	50,000
To Machinery	45,000	By Bank A/c (cash from creditors)	10,000
To Investment	70,000	By Tanu's Capital A/c (Debtors taken over)	55,000
To Fixtures	9,000	By Tanu's Capital A/c (Motor Car taken over)	60,000
To Tanu's Capital A/c (Bank Loan paid)	50,000	By Manu's Capital A/c (Machinery taken over)	40,000
To Manu's Capital A/c (Bills Payable paid, less 5%)	30,400	By Bank A/c (Investment realised)	76,000
To Bank A/c (Dissolution expenses)	2,200	By Bank A/c (Fixtures realised)	4,000
		By Loss transferred — Tanu 23,500, Manu 14,100	37,600
Total	4,26,600	Total	4,26,600

Partners' Capital Accounts

Particulars	Tanu (₹)	Manu (₹)	Particulars	Tanu (₹)	Manu (₹)
To Realisation A/c (Loss)	23,500	14,100	By Balance b/d	1,10,000	90,000
To Realisation A/c (Assets taken over)	1,15,000	40,000	By General Reserve (5 : 3)	10,000	6,000
To Bank A/c (Final payment)	31,500	72,300	By Realisation A/c (Bank Loan paid)	50,000	—
			By Realisation A/c (Bills Payable paid)	—	30,400
Total	1,70,000	1,26,400	Total	1,70,000	1,26,400

Bank Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	16,000	By Realisation A/c (Dissolution expenses)	2,200

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On dissolution the Realisation Account gives a loss of ₹37,600 (shared 5 : 3 — Tanu ₹23,500, Manu ₹14,100). The Bank Account totals ₹1,06,000, and the final cash paid out is Tanu ₹31,500 and Manu ₹72,300.

Concept

On dissolution, every asset (except cash/bank) and every outside liability is transferred to the Realisation Account at book value. Amounts actually realised are credited; amounts actually paid are debited. When a partner takes over an asset, credit Realisation and debit that partner's capital; when a partner takes over/pays a liability, debit Realisation and credit that partner's capital. The balancing figure is the profit or loss on realisation, shared in the profit-sharing ratio.

Realisation Account

Dr. Particulars	Amount (₹)	Cr. Particulars	Amount (₹)
To Sundry Debtors	55,000	By Sundry Creditors	62,000
To Stock	75,000	By Bills Payable	32,000
To Motor Car	90,000	By Bank Loan	50,000
To Machinery	45,000	By Bank A/c (cash from creditors)	10,000
To Investment	70,000	By Tanu's Capital A/c (Debtors taken over)	55,000
To Fixtures	9,000	By Tanu's Capital A/c (Motor Car taken over)	60,000
To Bank A/c (dissolution expenses)	2,200	By Manu's Capital A/c (Machinery taken over)	40,000
To Tanu's Capital A/c (Bank Loan paid)	50,000	By Bank A/c (Investment realised)	76,000
To Manu's Capital A/c (Bills Payable paid)	30,400	By Bank A/c (Fixtures realised)	4,000
		By Loss transferred — Tanu (5/8)	23,500
		By Loss transferred — Manu (3/8)	14,100
Total	4,26,600	Total	4,26,600

Bank Account

Dr. Particulars	Amount (₹)	Cr. Particulars	Amount (₹)
To Balance b/d	16,000	By Realisation A/c (expenses)	2,200
To Realisation A/c (Investment)	76,000	By Tanu's Capital A/c (final payment)	31,500
To Realisation A/c (Fixtures)	4,000	By Manu's Capital A/c (final payment)	72,300
To Realisation A/c (cash from creditors)	10,000
Total	1,06,000	Total	1,06,000

Partners' Capital Accounts

Dr. Particulars	Tanu (₹)	Manu (₹)	Cr. Particulars	Tanu (₹)	Manu (₹)
To Realisation A/c (loss)	23,500	14,100	By Balance b/d	1,10,000	90,000
To Realisation A/c (Debtors taken)	55,000	—	By General Reserve (5 : 3)	10,000	6,000

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Concept

Realisation Account

Bank Account

Partners' Capital Accounts

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